With all the chatter about sub-prime borrowers in over their heads, I have been arguing that the problem is far from limited to the poor and uneducated. I see a lot of brand new luxury cars and people buying homes from $700K to $1M and I just cannot believe the income levels are there to sustain all that. But the social pressure is there and when your neighbor gets one, you need one too (and feel like you deserve one). Emotions drive bad decisions and the lending markets have been there to feed the addiction.
This is the very first article I have seen that supports my theory. It is easy to get into a debt problems, it is easy to spend at an unsustainable rate, and people will do anything to keep the music going. Like drug addicts, I expect people to drain their savings, spend their retirement money and sell their assets, do anything they can, to keep up appearances.
The problem will be hard to see but like any unsustainable system, it will come to a halt eventually. And that time is most likely to be a very unhappy retirement when millions of Americans find themselves facing poverty at the age of 70.
And yes, this is all tied to housing and the exploding prices of SFH this past 5 years.
Even the Seemingly Well-Off Caught Easy-Borrowing Virus
April 14, 2007
Wall Street Journal
You may have seen that LendingTree commercial with a happy-go-lucky guy named Stanley Johnson, who brags about his big house, his new car and how "I even belong to the local golf club. How do I do it?" he continues with a big, dumb smile, "I'm in debt up to my eyeballs." Lowering his voice, but still smiling, he adds, "I can barely pay my finance charges." The smile doesn't leave his face as he drives a riding lawn mower, saying, "Somebody help me."
Thanks to easy credit, many Americans have been living well beyond their means. But that credit picture is beginning to change. And when you think about where the U.S. economy might be a quarter or two from now, you have to wonder how many Stanley Johnsons are out there. This isn't the stereotypical subprime borrower, with a spotty credit history and low credit score, but instead people perceived by friends and neighbors to be living the good life, some even sporting good credit scores.
For a preview, all you really need to do is check with someone like R. Douglas Ley, a certified public accountant and certified financial planner in Macungie, Pa. Many of his clients live in a wealthy part of New Jersey. Few get a closer peek into what is really going on than people like Mr. Ley, who do taxes. As I recently quoted him in a MarketWatch column as saying, "I am shocked by the bad and deteriorating financial condition of many of my clients."
He wasn't referring simply to the "careless tapping" of home-equity loans as though they were ATMs with a bottomless pit or the extensive use of credit cards while paying only the minimum payment. More disturbing, he says, is how some clients have perilously little in taxes withheld by their employers but then wind up with a sharply higher tax hit at year-end because they have resorted to tapping their 401(k)s or individual retirement accounts for living expenses. Such moves trigger a 10% tax penalty for early withdrawal. "Two of my clients had to sell their homes last spring to cover their 2005 liabilities, some big numbers. These clients had adjusted gross incomes in excess of $200,000. At least they were lucky because the housing market was firmer a year ago," he says.
